The only way I know how to value miles and points

Yesterday I saw Trevor at Tagging Miles musing about how he values his miles and points, but in listing the different methods he's seen people use, he doesn't mention the only one that makes any sense to me. Since he framed his post as a rhetorical question, I'll take this lazy Friday opportunity to answer it.

Points are worthless until you redeem them

Feel free to carve out a small exception for points that can be redeemed directly for cash, like Ultimate Rewards points and US Bank Flexpoints, but the essential fact is that banked miles and points are the worst possible form of savings, outside of a large investment with Bernie Madoff:

• Unlike money, they don't belong to you;
• Unlike money, they can lose some or all of their redemption value overnight, whether through mergers, devaluations, or bankruptcies;
• Unlike money, they don't earn interest.

That's why I keep my points balances as low as possible, and will almost always privilege redeeming miles and points over paying cash for reservations. Obviously I'll maximize the value of my miles and points over all my anticipated future reservations, but I don't store up miles and points for speculative, possible future reservations, when I need plane tickets and hotel rooms in the here and now.

When redeeming points, decide whether to earn more

The other reason to redeem miles and points, rather than cash, as aggressively as possible is that it affords a unique opportunity: the ability to see how much your miles and points are actually worth.

Like anyone else, in the process of planning each trip I search simultaneously for paid and award flights, and paid and award hotel nights – not because I'm interested in paying cash for a flight or hotel room, but because it gives an instant, accurate picture of how much my miles and points are worth: just look at the flight reservations you would make and hotel rooms you would book if you were paying cash, and look at the flights and hotels you would reserve if paying with miles and points.

For example, I earn 1.4 Delta SkyMiles per dollar spent on my Platinum Delta SkyMiles American Express card when I spend exactly $25,000 and $50,000 per calendar year (which, it follows, are the only amounts it makes sense to spend on the card). Since my next best card for unbonused spend is a 2.22% cash back Barclaycard Arrival+ card, I know I need to redeem my SkyMiles for "a bit more" than 1.59 cents each to justify manufacturing additional SkyMiles. I'll typically compare American, Delta, and Alaska fares, since those are the three airlines whose flights I can credit to the Alaska Airlines Mileage Plan.

If I find myself consistently redeeming my SkyMiles for less than 1.59 cents each, I know I need to shift my earning either to cash back or to another, more valuable rewards currency.

But note that this has no effect on my willingness to redeem my SkyMiles. With the ongoing devaluation disaster taking place at Delta, it would be madness itself to hoard SkyMiles for a speculative, future redemption if I already have enough SkyMiles in my account to book an award ticket (of course if I have another, higher-value redemption coming up, I'll redeem my SkyMiles first against that reservation before redeeming them against the less-valuable one).

Conclusion

That is the entirety of my methodology for valuing miles and points: I rely on the actual value I receive from the miles and points I manufacture, and use that value to decide which miles and points to manufacture on an ongoing basis. If, due to devaluations, movement of hotel properties between categories, or restrictions on award space, I find that I'm not getting enough value to continue manufacturing the miles and points I have in my accounts, I respond accordingly.

But I'll always privilege miles and points redemptions over paying for my travel with cash.